Sept. 15 (Bloomberg) -- Former Federal Reserve Chairman
Alan Greenspan said deficit spending by the federal government
hasn’t been as effective at stimulating the economy as expected.

“I’m not saying the stimulus is not working, I’m saying
it’s working far less than anyone anticipated,” Greenspan said
today at the Council on Foreign Relations in New York.

Greenspan said the “most effective” stimulus would be an
increase in stock prices rather than more government spending.
He also said he favors raising taxes to curb the federal budget
deficit, joining the debate in Congress over whether to extend
reductions enacted under President George W. Bush.

“We have to find a way to settle down the extent of
activism that is currently going on and allow this economy to
heal,” Greenspan said. “We would be far better off to allow
the normal market forces to operate.”

Taxes and spending are dominating the congressional agenda
less than two months before elections that will determine
control of the House and Senate. President Barack Obama is
defending his economic policies against criticism from
Republicans, who argue they haven’t been effective and have
widened a budget deficit that reached a record $1.42 trillion in
2009.

Obama last week proposed a package of $180 billion in
business tax breaks and infrastructure spending to boost the
economy. That would come on top of the $814 billion stimulus
measure enacted last year.

Extending Tax Cuts

Obama also wants to extend Bush-era tax cuts for
individuals who make less than $200,000 a year and couples
earning less than $250,000 while repealing them for those who
earn more. Republicans want to extend cuts for all taxpayers.

Greenspan said raising taxes in a weak economy isn’t an
ideal option.

“There are risks, but our choice is not between good and
bad, it’s between terrible and worse,” he said. “Unless we
come to grips with the deficit quickly we’re fooling ourselves
as to how much time we have.”

A relapse into a recession is unlikely, said Greenspan, 84,
who was chairman of the central bank from 1987 to 2006 and
didn’t comment on monetary policy in today’s remarks.

“What we have going for us is that the tinder for a double
dip is not readily available,” he said. Still, he repeated his
warning that if housing prices drop, “all bets are off.”

Unemployment Rate

The economy grew at a 1.6 percent annual rate in the second
quarter, hampered by an unemployment rate that has stayed above
9 percent all year. The unemployment rate rose to 9.6 percent in
August from 9.5 percent in July.

Greenspan cited the level of excess reserves in the banking
system as evidence of the uncertainty that’s restraining
recovery. As of Sept. 9, U.S. banks have $1.01 trillion in
excess reserves.

“There is a heavy weight of uncertainty on the system such
that we are not getting the impact of a trillion dollars already
on the books into the marketplace,” he said, describing the
situation as a “liquidity trap.”

“Our financial institutions are still partially disabled
and will continue to be disabled until we restore a level of
capital in the system that enables the average lender to a
depository institution to feel secure,” he said.

Capital requirements proposed by the Basel Committee on
Banking Supervision earlier this week are a move in the right
direction, he said.

“The nature of the regulations that were promulgated by
the Basel committee made sense to me,” he said.

As Fed chairman in 2001, Greenspan supported the first
round of tax cuts under Bush. At the time, the federal
government operated with a surplus, and Greenspan told Congress
he didn’t think the cuts would lead to a deficit.